Preserving Web Agency Profits with a Discovery Engagement

The All-to-Familiar Scenario

“We have a budget of $50,000 for a new website. Please send us your proposal. And by the way, here’s the RFP outlining the list of features we require...”

Desperate to win the next project, you (the agency owner/business development lead) put together a detailed proposal that includes everything the prospective client wants.

You ask your web development team how long certain items will take. They raise a few flags but you do some googling and see that there seem to be off-the-shelf shortcuts to get them done faster and save effort.

You ask your designers how many templates need to be designed and the number they suggest feels too high. We can probably make do with half that and just recycle more templates, you reason.

You put the finishing touches to the proposal. It’s detailed in that it addresses all of the prospect’s requirements. It’s got a number that’s just shy of $50k for added competitiveness. You attach and send off, hoping for that win.

A week later, you get the news that your agency has been selected as one of two finalists. You’re invited to come and present to the stakeholders in person. You put together an impressive capabilities deck with relevant case studies. You go and nail it, establishing easy rapport with the prospect’s team and getting good vibes all around.

Another week passes, and you get the call from your primary point of contact. You’re informed that they’ve selected you as the agency!

They’re eager to work with you. However, they’d like to make sure the proposal can include a couple more items. One is a new feature that was never mentioned in the RFP. The other is a hard deadline, also never mentioned, which gives the agency 12 total weeks to deliver a launch-ready website.

You ask if there’s wiggle room for additional budget and time and they say no. The deadline is a dealbreaker and the feature is something the CEO “really, really wants.” Okay, you think, we’ll just have to make it work. You accommodate the asks and create contracts with all the requirements, including the additional asks, outlined and priced out at the sub-$50k budget.

Ten weeks pass. Your team has been working frantically to meet the deadlines. The client hasn’t been helpful as they’ve missed their own deadlines for providing feedback on designs and supplying content for the website. They've pushed out their supposedly non-negotiable deadline out by 3 weeks. While this will cost you, your team actually sighs with relief because they could use all that time to catch up.

Even with the extra time, you’ve had to pay out of pocket for a freelance developer, who’s charging $100/hour, to come and help your team because of the sheer amount of work still left before the new deadline. You realize that this will eat about $7,000 in costs that you’ll have to pay out.

Coming up on the last week before launch, everyone on the project team makes a concerted push and the site gets done. The client seems happy and the work turned out well, something you will add to the agency website when you find the time.

When you tally everything up–the total hours spent by the team, the salary paid out (pro-rated by how much of their time was spent on this project), and the amount spent on the freelance developer–you realize that the cost to the business is close to $65,000, a good 35% more than what the client has agreed to pay. That means, rather than make a profit on this project, you’ve actually paid out of pocket for the opportunity to work on the project. Ouch.

Luckily, this doesn’t happen on all of your projects otherwise you’d be out of business. You have some projects where the scope of work is simple and straightforward enough that you’re able to get it done on time and on budget with a lean team. You also have hourly work from support and maintenance contracts that already have profit margin built-in. However, you’re noticing that there are more and more “blow-up” projects where the opportunity seems promising but the risk for financial disaster is also very present. A few more of these types of projects and you’re not sure if you can really sustain the blows.

Avoiding the Downward Spiral

As an agency owner, I’ve been down this very road. Once you have a certain number of employees and want to ensure you can make payroll every two weeks, winning new business can become less strategically-driven and more a matter of feeding the insatiable expense beast. When work is plentiful and the clients are paying well, everything can seem rosy. However, the moment work starts to dry up and the inflows aren’t as robust, any new work can seem like a lifeline.

It's precisely when you're desperate for new business that the big erosion of profits can really start to build momentum. The decision to take on projects that, objectively speaking, have a slim to nil chance of being profitable, solely for cash flow reasons can send the agency in a downward spiral.

The prudent thing that I haven’t always had the courage to do is to cut costs aggressively and re-examine the way we position the agency and develop new business. This means laying off people and tightening whatever expense you can until you’re able to recast the agency in a way that attracts more profitable projects (see the works by David B. Baker and Blair Enns for more on the topic of positioning and business development).

This path sounds like the worst thing that can happen, but the alternative is actually worse: money-losing projects mean taking on more work than you can handle just to keep the lights on, which means working your employees extra hard beyond normal capacity, which means burn out in the long run and a rise in employee turnover. So rather than being in the driver seat when it comes to controlling the situation, going the route of “taking on any projects at all costs” means creating an environment where employees wouldn't want to stay anyway. The intentions may have been good, but the consequences will say otherwise and the employees who stick around to experience the downward spiral won’t speak kindly of your ability to lead.

Also, you'll make a lot less money this way and start to question why you ever got into this line of business in the first place, but that's a topic for another day.

So spotting and saying “no” to the unprofitable prospects is step one, even if that means making some tough decisions and big changes internally.

Selling a Discovery Engagement

Step two, if the prospect seems like they may offer a chance for a profitable project but there are some unknowns and risks, is to sell them on a Discovery engagement.

The ultimate goal of a Discovery engagement is to give your team an opportunity to fully understand the scope of the project, to align with client on said scope, and to collaboratively develop a concrete implementation plan with various risks and unknowns vetted out.

The Discovery engagement itself you’ll want to tailor to fit the process that most benefits the way your agency works. You can reference our Website Discovery Proposal that we sell on AgencyDocs ($19). You’ll see how we’ve curated a number of different workshops and activities to help us establish the priorities and important details in a website build. In this section, I'll focus more on what's needed to sell a Discovery.

We’ve gone through several iterations of Discovery engagements during the 13+ years of running an agency. The toughest part is selling the prospective client on the idea that a Discovery engagement is to their benefit and that, in the long run, they’ll have a better and more robust solution. There have been many prospects who've flat out refused to do a Discovery, and we've generally passed on such opportunities especially if there's too many unknowns or perceived risks.

When it comes to selling a Discovery engagement, you'll need a couple of foundational pieces in place.

First, it’s hard to sell anyone on a strategy-only deliverable without establishing credibility. Credibility can come in a few different forms. One is having a body of work that shows the prospect that the agency has relevant experience and a track record of having successfully delivered similar solutions. In the absence of a strong portfolio or case studies, the personal experience of the people who’ll be staffed on the project can be played up to assure the prospect that they have relevant experience. For agency owners who’ve come from another agency environment, this could mean referencing similar work done while employed elsewhere. Beyond the body of work can be references from former clients as well as any thought leadership pieces, but in my experience, the portfolio is really key in giving prospects the confidence to pick your agency.

A quick tangent: this is why I can understand that, for someone starting an agency, it’s not the worst thing in the world if you take on some projects at breakeven or a slight loss in order to build up the portfolio. I think the hard thing to do is to ensure that you’re being strategic when you make these types of decisions rather than getting used to (or addicted) to winning via low price / poorly scoped proposals. We fell into this trap for a while and got swept away by the feeling of continually winning only to feel squeezed later on with negative margins and a slew of financial challenges (including a bloated payroll from needing to staff up to get these projects done).

Besides credibility, the other important element for selling Discovery is to convince the prospect that it’s a natural part of the process and that you’ve done it before. This may not be completely true when you’re first starting, but this is where you have to project a bit of “fake it till you make it”. Perhaps there was a project where you had certain workshops that resembled what you’ll have in the Discovery—those are perfectly legit to reference as real experience in taking clients through the process. It’s very important not to oversell the Discovery as a standalone but more as the initial phase to the overall project. The benefit is that this initial phase allows you to more accurately estimate the implementation phase both in budget and in timing. This means mitigating risk and creating some downside protection by surfacing as many risks and unknowns ahead of time.

So to recap: the key to selling Discovery is having the bona fides (credibility) and confidence (act as if you’ve done it all along for all clients) to assure the prospect that this is the only way forward to achieving a successful end result.

Discovery Engagement Tips

A few other thoughts about selling, positioning, and running a Discovery engagement:

Do It For Free

I don’t completely recommend it, but if you have the bandwidth and want to make the investment, it’s not the worst idea to do some Discoveries for free. Perhaps it’s for a prospect that feels like a long shot and rather than doing spec design work or a really custom presentation deck, engage them in a series of free workshops in order to flesh out a robust proposal. This could be the real-life practice that provides additional confidence for you and the team to offer paid Discovery engagements later on.

Make Sure It’s Collaborative

A surefire way to get buy-in on the final implementation proposal is to involve the client throughout the Discovery process. For us, interactive workshops where we brainstorm, sketch, generate Post-Its, and challenge each other on what to keep and what to omit have been great bonding experiences as well as a way to build up to a final roadmap.

The worst thing you can do is go off for a few weeks and then come back with a huge roadmap in a “big reveal” fashion, prompting the client to digest a mountain of information and try to make decisions then and there. Aim to provide a more pleasant experience and the client will reward you.

Align on a Target Number

We’ve learned the hard way that going into a Discovery without a target number can lead to a frustrated client ("Wow, I didn't realize it would be this expensive, it's totally off the mark...").

Even if the client is coy about sharing a hard budget, we’ve found it beneficial to be upfront about a target range. “I understand you’re not firm on a number, but we’ll be targeting a $200k-$250k budget for implementation,” you might say. That should get you a reaction along the lines of “okay, sounds good” or “well, we were actually hoping to keep it around $175k”.

Most times, the Discovery, because it inevitably surfaces features and additions that the client forgot to mention or include in the RFP, will yield an estimate greater than what the client had hoped for. The key is to show how you can get to the target number by scaling back on certain items and providing the client with a choice to pay more or hold off on including the items this time around. In our experience, Discoveries not only lead to an implementation project, but it also generates a backlog of items that lead to more work post-launch.

Do a Pre-Discovery Estimate

While the Discovery process will yield a more accurate number for the project ahead, it’s worth doing a quick high-level estimate prior to the start of the engagement.

This is something that many of us do anyway whenever we start speaking with a prospect. Once you know of the CMS/ecomm platform and some of the core features, you can leverage whatever tool you may have (we have a spreadsheet where you can toggle on features and # of templates) to arrive at a number.

The value of having this number is to help provide some kind of starting point and to make sure that the client’s target number (see above) isn’t unrealistic. We’ve had cases where the pre-discovery estimate ended up being spot on with the number that came out of Discovery and other cases where the Discovery number of was a lot more or a bit less than the estimate.

Involve Team Members Throughout the Process

This might be obvious to many of you, but it’s imperative that the Discovery process involves people who’ll actually be doing the work (or at the least, people who’ll closely oversee the work).

It looks something like this for us: there is a design lead, dev lead, and project management lead who all participate throughout the Discovery process and are very hands on with providing estimates for their respective deliverables and responsibilities. They also provide estimates on things like hours needed for meetings and responding back to feedback on deliverables.

When you leverage the collective knowledge of people who actually do the work, you find that there are a number of overlooked and forgotten items that emerge and make their way onto the roadmap.

Flag & Communicate Findings Early

In the spirit of collaboration, it’s important to communicate and explain the impact of certain findings throughout the process rather than waiting to show them on the roadmap / final proposal.

For example, let’s say that you conduct a deep website audit and realize that the migration of existing content is going to be a much bigger lift. It’s beneficial to let the client know right away that this finding will have an impact on the budget and that perhaps the target number should be revisited or they should anticipate making deeper cuts on some other features if they still require the migration piece.

As challenging as some of these conversations may be, it’s so much easier to have them early on than having to explain why the implementation estimate is 50-70% above the target number with no realistic chance of cutting enough things to be on budget.

It's All About Putting in the Work at the Beginning

The Discovery engagement is not a magic bullet or some kind of miracle approach. I see it more as a reconfiguration of project effort where we front-load the work in order to avoid scrambling and desperately throwing resources towards the end of the project to make it towards the finish line.

By taking the time to collaboratively audit, research, plan, and align before designing a single template or committing a single line of code, you give yourself the opportunity to reduce uncertainties or misaligned expectations that can drag on or blow up a project.

Discoveries take practice and our experience tells us that we’re still learning something new from each engagement we go through. There are plenty of things that we’ve missed in our Discovery phase but what we aim for is not perfection but incremental progress. If we can just do it 5-10% better the next time, that’s incremental profit that, over time, will add up.